Actual Negotiating price with sellers and end buyers

Here is a formula that a lot of active wholesalers are using to compute whether a house will be a good deal or not. The formula is solving for the After Repair Value (ARV) or what would be known as the market value if in good condition.

(ARV x 70%) - Rehab Costs = Wholesale Price

It is imperative to know what is the market value of the home As Is and after repaired/remodeled (if needed). You then simply discount that amount to make it appealing to your end buyer and pay you for your time and energy.

There is a fine balance between satisfying the seller and getting the lowest price possible. It helps to know the seller's motivation for selling. You can then work to meet that criteria.

On Simon's formula above "(ARV x 70%) - Rehab Costs = Wholesale Price" be sure to also subtract the amount of your fee from the price that you are offering the seller.

Karen

(ARV x 70%)
- Rehab Costs
- your fee
= Wholesale Price"

Thank everyone for your responses. I will definitely keps your suggestions in mind.

Verna

Your fee...

Aaron

Thanks to everyone for your responses. I want to make sure I really understand this formula.

I see investors using mostly 65%, but on this site members often use 70%.

First I determine the ARV. Then to determine the offer I make to the motivated seller I should offer anywhere from 10 to 60% of the ARV. Is this the correct formula to determine the offer to make to the seller?

$250,000= ARV x 45%= $112,500 - $35,000 (repairs)= $77,500(offer to seller)

To the end buyer this is the formula:

$250,000=ARV x 65%= $162,500-$35,00(repairs)= $127,500 (offer to buyer)

This is where I get confused. I know I haven't included the wholesaler fee in the end buyer formula, but that's because I seem to be missing the step that determines how much fee I should ask from the end buyer. I though my fee was supposed to be the difference between the offer to the buyer ($127,500) and the offer to the seller ($77,500), which would be $50,000 and that just doesn't make sense!! ($127,500 - $77,500 = $50,000 wholesale fee??).

Is this correct below?

$250,000=ARV x 65%= $162,500-$35,00(repairs)- $50,000(wholesale fee)= $127,550 (offer to buyer).

If the buyer sells property for the ARV of $250,000, there is a potential profit of $122,450.00.

Please tell me what I am doing wrong because it seems ridiculous that my wholesale fee would be $50K!!!!

Thanks.

Verna,

I like you am a tad bit confused however I come away with this offer formula to use

I figure out arv and I also figure out Reo why the reo you say?

Reo determines the bottom of your particular market,

Arv determines mint condition if sold now

That gives me conversation know how and makes me feel comfortable. ..

Second like the offer formula used aboved I use it as a template

Arv x 70% percent= - minus repair- minus end buyer profit they would like to make - my profit

So it looks like this:

ARV= $321, 000
x 0 .70
________________
$224, 700

Next step $224, 700
- $24, 452 (repairs)
____________________
$200, 248

Next step $200, 248
-$32, 100 (10% percent of ARV my buyer wants)
______________
$168, 148

Next step $168, 148
-$ 12, 840(my profit at 4% percent)
____________________
$155, 308

Normally this is the MAO (maximum allowable offer)

However I am in the state of ny and in the county I plan my rei investing there is a transfer tax formula used in this way

NY State Transfer Tax $4 per $1, 000 of price

Now we will factor this in to the fees Arv $321,000 x $4 = $80, 250 (however this is one of two transfer tax incurred because remember we will sell to our buyer and we will incur this ourselves) so to get our transfer tax amount we will use the MAO as our guiding point.

I must take a break as I am on my phone and not home I will clear it up and explain my number

Thanks for reading this far and for allowing me to comment on your post Verna I know I am long wind in response

JOEL

Sorry I determined transfer tax by dividing not multipling

$321, 000 / $4= $80, 250

Lets break down the best formula Ive used for determining what to offer.
Remember, real estate is ALL about the numbers and not so much the property itself. The only time you ever make it about the house itself is if you want to live in it lol

Wholesaling is truly about us negotiating a briefcase full of cash. That's really what it is at the end of the day. For example we are selling a briefcase full of cash at $30,300 for $5,000.00 when you let go of the brick and mortar.

ARV: $250,000.00
Deduct %15(x.85)-this is your real estate agent commission on the selling side at 6%, market & bargaining adjustment at 6%, and closing costs at 3%
Minus Repairs
Minus Profit
Minus Your Fee
Equals your Maximum Allowable Offer

ARV: $250,000.00
x.85= $212,500.00
-20,000 repairs= $192,500.00
-25,000 profit= $167,500.00
-5,000 fee= $162,500.00 this price is literally your maximum allowable offer!
It is not what you would offer first, our job is to get close to zero as much as possible. So you would offer what you'd feel embarrassed about first like $120,300 at least lol up until the seller accepts the price at 167,500 to the EXACT dollar.
That way you know for sure if the buyer does his project right he will get $25,000 +/- change. Even if you had to take a wholesale fee cut from $5,000 to $3,000.
PIGS GET FED, HOGS GET SLAUGHTERED. Dont be greedy.

Everybody does it to what works for them.

I agree to your saying "pigs get fed hogs get slaughtered"

This is why we use this forum to check our numbers

And we learn as we go......

Adam are u using an assigning method for ur example or double close?

That quote is a very old saying in the real estate business.
That equation is easiest for an assignment of contract because there is no other associated fees. If you used a double close you'd have to consider in the equation the fees your transactional lender would charge you.
So if your transactional funding charges $2,500.00 well that's another expense. Same overall equation just another subtraction before subtracting your fee ya know.

Thanks Adam,

for the clarification......

Verna is the equation easy to understand now?

Thanks for the formula breakdowns. It made it much clearer. Adam thanks for the book resource tip. I will definitely check it out. The formula breakdowns with explanations is exactly what I have been wanting to see.

Joel in your breakdown you determined your fee at 4% of the ARV. How did you come up with the 4% rate? Is that a standard percentage that is used?

And Adam, I understand that you are saying that I may need to accept a lesser fee as long as I can negotiate a price with the seller that will allow my end buyer to get what they are looking for out of the deal.

Thanks again. This has really helped me to understand how to determine if my deal is good or not.

Thanks

Hey Verna,

Simon's formula and then Karen adding in your fee is how you do this according to Dean and Matt. Sure folks have their own methods but this is what most folks go with. They always say use the 30% rule but if your not getting any offers accepted then you can adjust it up to 25%, if your getting more then one offer accepted then you would adjust it down to 35%

EXAMPLE: MAO on a $250k arv with you using your cash:

250,000 - 75,000(30% rule to start with) - 30,000(repairs) - 10,000(your fee)= $135,000(MAO) You would not offer $135k first because more then likely there will be counters back and fourth. Maybe offer $125k-$128k, but in the end, you should not pay more then $135k.

Hey Jack,

Where is the profit for your cash buyer in your equation?.......

Verna,

Adam has a point in not over stepping on the deal by trying to get a lot of money and not leaving some meat on the bones.....

I used 4% percent because a realtor makes 3% percent and I did not leave a broker's office to make the same in commission....

However when I was viewing Matt's super wholesaling on Insider Elite he broke down double closing, (since nys u can not assign a contract so I have been told, would love to be proven otherwise by a real estate attorney) I started incorporating what my closing cost would be so that I do not incur them.

Furthermore in nys you have to pay transfer tax which is calculated at $4 per every $1000 the value of the house is at that time.....

But Jack reminds us a very important point adam first mentioned keep it simple.

================================================================================================

So using Jack's example

ARV is $250,000

Reo is $202,000

However Matt says to get the price below the Reo price (real estate owned or as he says the bottom of the market)

$202,0000 x .85 = $171,000

$171,000 - $30,000( repairs as mentioned by jack) = $141,00

$141,000 -$10,000( my profit according to the above example ) =$131,000

However because this is the MAO (maximum allowable offer ) I will factor in nys transfer tax

$131,000 - $524 transfer tax = $130,476 this is my personnel MAO and o would put an offer in for $123,787( I just made up this number)

I hope I wasn't giving anyone the impression that I want or intend to be a "greedy" wholesaler, because I'm not. All I'm really trying to do is to learn how to crunch the numbers, be fair to the seller, the end buyer and myself.

I appreciate you further providing the examples for clarification. I can understand why you also run the figures as REO to get your bottom line value, but not all properties are REO.

My main concern was how wholesalers determined what their fee to the end buyer would be. With your explanation I can see your point why you use a 4% of the ARV. Makes sense. But, in all the other formula examples used it appears that each person seemingly used some arbitrary figure for their wholesale fee. That's why I was originally asking about the formulas because I wanted to know how one determined what their actual fee would be. You said you used 4% of the ARV and I can get that. I do understand that the wholesale fee has to be deducted. I just wanted to understand if there was a mathematical method of determining that fee. But unless I get a better explanation I will be using your method because as a former real estate agent I agree with you.

Thanks for your response. I don't mean to seem dunce, but I've never heard of the "30 percent rule". Please explain what that rule is. In your example it just seems like a deduction for no reason.

Thanks

I really appreciate all your help. I am really trying to get a solid understanding of these numbers because I want to be comfortable with what I'm doing. I hope all my questions are not getting on anyone's nerves.

Thanks.

Hey everyone I hope no one thought that I was saying anyone was being greedy or immoral in this topic. When I mentioned that old saying, "pigs get fed, hogs get slaughtered" is that speed is also a huge part if the process. That if we try to get a $15,000 that's more than okay. We can determine our worth. But if we ended up having to take $5,000 than that's okay as long as our investor gets what they need to make the deal work.

Verna,

The reason I look at Reo's it is not because I think the prop is worth the amount of a Reo, it is because as Matt mentioned once why would a buyer buy from me when Reo's in the area go for much less? That's my logic for making sure I have a deal, Matt mentions once you know the bottom and buy below that you always have a deal, and if your buyers aren't hungry enough then you need a stronger buyers list or the spread isn't good enough.

As for the wholesale fee (our profit) you may see it may fluctuate because we are usually approaching wholesaling in one of the three ways, either as a bird dog usually the lowest amount you get because you are passing on the deal without negotiating much, or you are assigning the deal which if I am not mistaken doesn't involve much parties like lawyers, agents, etc. and therefore it will not affect the deal as much and
In certain situations if your in a state like mine (NY) where you have to double close since assigning is not allowed you have to factor in the formula jack / Adam used then add transactional funding, closing cost, and since NYS is very forthcoming on their transfer tax and even NYC as well these costs can eat away at your $10,000 profit. That is why I would factor it in and not let my profit become affected.

My 4% percent rule will be my standard percent I would use because of what I previously mentioned. but it can and will fluctuate depending on the deal and that will be your choice as well Verna , the way I see it once you take care of your end buyer you take care of your real estate investing and business dealings. One thing I disliked about the brokers office was learn as you go no help from us because you will either sink or swim..... And I for one, in trouble waters will always learn how to float, dare I say even swim......

Hope I explained why it is not about being greedy that it is about being logical and empathetic to both parties we are trying to help.

Joel

P.S. If you do not ask questions how will you ever learn? How will any of us truly learn?

It is pretty straight-forward! Don't over complicate it! Just use the formula!

Sometimes when communicating in writing we don't always come across like we really intend to. I just didn't want it to seem like I was trying to find a way to get every penny possible out of the deal.

Joel and Adam, I truly appreciate that when you provided information you provided and clear explanation along with it so I could see how the numbers made sense.

Adam, you were fine. Didn't get any wrong impressions about what you were saying.

Thanks again to everyone you for shedding light and some understanding to what I was doing. I'm going to make you all proud of me. LOL

I agree with Verna I did not take it wrong, shoot I'm confused half the times anyhoo

By using your ARV x .70 (as Simon said and which is what Jack is referring to as the 30% rule) this is combining the 10% which would be closing costs and holding costs PLUS 20% profit for the end buyer.

So... $250,000 x .70= $175,000 (or subtract out the 30% the way Jack did, same answer)
Subtract your repairs $175,000-$30,000= $145,000
Subtract your fee $145,000-$10,000=$135,000 MAO That's it! It's that simple!!!

If you do a double close, then you subtract the amount your TF or PM or HM will cost you. AMEN.

As far as determining what your fee will be, it can fluctuate higher or lower. Just so it is still a good deal for the end buyer. If you get a smokin' deal... say you get the above for $100k, you can get a higher fee. If you have to go $140k to get it under contract, cut your fee to $5k instead of $10k. But until you get a feel for doing that, the 4% suggestion is a good rule of thumb.

Good luck! Don't make it harder than it is because of fear.

Karen

Now that was the explanation that made the light bulb go on for me! Thanks for explaining the 30% rule Jack referred to.

Just one other question: The .70 represents the percentage that most buyers are looking for in their deal? Because I noticed that on Dean's site most people use that percentage in their formula, but I have seen many investor's use .65.

Thanks.

When the market was at the really down level, we were able to get the .65 or 65%. Tough to do that now. 70% can still be used in much of the country, but a lot of places, for example Los Angeles and Denver are having to go 80%.

As the market changes, your percentage used may have to change some also.

Glad that this helped.

Karen

Thanks for the percentage explanation. I understand that as the market fluctuates the percentage used would need to change accordingly.

You've been a great help.

I'm with you on moving and adjusting the number accordingly. I adjust to the market. Here in Sacramento, CA I use 20-25%. Most 20% though. Hope this helps.